Nokia (ENOUGH) Offer to buy U.S. optical networking equipment maker Infinera in $2.3 billion deal puts Finnish company on track to profit from billions of dollars of investment invested in data centers to respond to the rise of artificial intelligence.
The deal would allow Nokia to overtake Ciena and become the second-largest supplier in the optical networking market with a 20% share, behind Huawei, which benefits from the minimal presence of Western companies in China.
Telecommunications equipment makers, facing declining sales of 5G equipment, are looking for ways to diversify their markets and enter growth areas such as AI.
Nokia’s move will allow the company to sell more equipment to major technology companies such as Amazon, Alphabet and Microsoft, which are investing billions of dollars in building new data centers to accommodate the rise of artificial intelligence.
“This is a rather optimal time for a transaction of this nature, just before the market starts to recover,” Nokia Chief Executive Pekka Lundmark told Reuters in an interview.
AI, an important driver of investments
“AI is driving significant investment in data centers…one of the main attractions of this acquisition is that it significantly increases our exposure to data centers,” he said.
Data centers use optical transport networks – glass cables that transmit digital signals – to allow electronic devices to communicate with each other.
Infinera is particularly strong in the area of intra-data center communications, which refers to server-to-server communications within data centers. It will be one of the fastest growing segments in the overall communications technology market, Lundmark said.
Nokia shares rose 4% in morning trading, signaling that shareholders are optimistic about the deal. Buyers’ stock prices would typically decline because of dilution in a cash-and-stock deal.
Nokia, which will pay 70 percent of the purchase price in cash and the rest in shares, expects to save 200 million euros ($213.88 million) in costs after the deal closes next year.
Although the purchase multiple may be somewhat high given that Infinera has had an uneven growth trajectory, if Nokia could extract the 200 million euros in synergies, then the purchase price would be justified, Mads said Rosendal, analyst at Danske Bank Credit Research.
Infinera does about 60% of its business in the United States, while Nokia has a larger share in Europe and Asia, making it a complementary deal, Lundmark said.
“The two companies together have a combined cost of sales of more than 2 billion euros and operating expenses of more than 1 billion euros… so compared to this target, 200 million (euros) is not particularly exaggerated,” Lundmark said, adding that it was too early to comment on possible layoffs.
($1 = 0.9351 euros)
(Reporting by Supantha Mukherjee in Stockholm; editing by Ros Russell)
